20090918Idaho Power-Avista Comments.pdf

Barton L. Kline
Senior Attorney
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An IDACORP Company
September 18, 2009
HAND DELIVERED
Jean D. Jewell, Secretary
Idaho Public Utilties Commission
472 West Washington Street
P. O. Box 83720
Boise, Idaho 83720M0074
Re: Case No. GNRME-09-03
IN THE MAnER OF A REVIEW OF THE SURROGATE AVOIDABLE
RESOURCE (SAR) METHODOLOGY FOR CALCULATING PUBLISHED
AVOIDED COST RATES.
Dear Ms. Jewell:
Enclosed for filng please find an original and seven (7) copies of Idaho Power's
and Avista's Initial Joint Comments in the above-referenced matter.
Please return a stamped copy of this transmittal letter for our files in the enclosed
self-addressed stamped envelope.
Very truly yours,
,,~
Barton L. Kline
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Enclosures
1221 W. Idaho St. (83702)
P.O. Box 70
Boise, ID 83707
BARTON L. KLINE (ISB No. 1526)
DONOVAN E. WALKER (ISB No. 5921)
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
Telephone: [phone]
Facsimile: 208-338-6936
bkline (g idahopower .com
dwalker(g idahopower.com
Attorneys for Idaho Power Company
Street Address for Express Mail:
1221 West Idaho Street
Boise, Idaho 83702
MICHAEL G. ANDREA (ISB No. 8308)
Avista Corporation
1411 East Mission Avenue-MSC-23
Spokane, Washington 99202
Telephone: [phone]
Facsimile: 509-777-5468
michael.andrea (g avistacorp.com
Attorney for Avista Corporation
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF A REVIEW OF
THE SURROGATE AVOIDABLE
RESOURCE (SAR) METHODOLOGY
FOR CALCULATING PUBLISHED
AVOIDED COST RATES
)
) CASE NO. GNR-E-09-Q3
)
) IDAHO POWER'S AND AVISTA'S
) INITIAL JOINT COMMENTS
)
)
In Order No. 30873 issued in this case on August 6, 2009, the Commission
directed Idaho Power Company ("Idaho Powet'), Avista Corporation ("Avista"), and
PacifiCorp to answer several questions, in "broad and general terms", concerning the
current surrogate avoidable resource ("SAR") methodology. Avista and Idaho Power
(sometimes referred to collectively herein as ''the Companies") hereby submit this joint
filng in which Avista and Idaho Power provide their answers to the questions posed by
the Commission in Order No. 30873.
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 1
I. Historical Context
In Order No. 30873, the Commission described how the SAR methodology has
evolved over time. In fact, it was approximately twenty-nine years ago, August 8, 1980,
when the Commission issued its first order (Order No. 15746) establishing the principles
applicable to purchases of power from Public Utilty Regulatory Policy Act of 1978
("PURPA") qualifying cogenerators and small power producers ("QFs"). In Order No.
15746, the Commission directed Idaho Power Company, Utah Power & Light Company,
and the Washington Water Power Company to provide drafts of tariffs and standard
contracts which would be offered to QFs to faciltate purchases of energy and capacity
by the three utilties. In Order 15746, the Commission determined that each of the three
utilties would use a hypothetical baseload coal-firéd generating plant as the generation
facilty that could be deferred or avoided. As such, the cost of this coal-fired facilty
would be used to set avoided cost rates. It was not until 1993, in Case No. IPC-E-93-
28, that the Commission concluded that the avoidable resource or SAR should no
longer be a coal-fired generating plant but instead should be a natural gas-fired
combined cycle combustion turbine.
By initiating this proceeding, the Commission has acknowledged that another
shift has occurred in the type of generating resource that utilties may avoid by
purchasing energy from QFs. Idaho Power and Avista have each identified in their
respective Integrated Resource Plans and other resource acquisition documents their
intentions to acquire, outside of PURPA, substantial amounts of power generated by
renewable resources-rincipally from generation using wind as its motive force. Idaho
Power and Avista understand that PacifiCorp, dba Rocky Mountain Power, has similarly
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 2
identified in its resource acquisition document its intent to acquire power generated by
renewable resources-principally from generation using wind as its motive force.
There has been at least one other major change that has occurred since the last
time the Commission addressed the type of SAR to be used to set avoided costs.
Specifically, several states, including Washington and Oregon have implemented state-
mandated renewable portolio standards ("RPS"). Also, a similar renewable energy
standard ("RES") is being considered at the federal leveL. Thus, it is important that the
Commission address compliance with such standards when considering a change to
the SAR methodology. For all of these reasons, the Commission's decision to initiate
this proceeding is both timely and appropriate.
II. Companies' Responses to Commission Questions
The Commission's questions and the Companies' initial responses are as
follows:
1. "Does the present SAR methodology for published avoided cost
rates need to be modified or augmented? Yes or No."
Answer: Yes.
2. "If answer to Question 1 is yes,
a. Please provide the basis for your answer.
The present SAR methodology for setting published avoided cost rates (or
PURPA rates) should be modified to ensure comparabilty with resources the
Companies would build and own or otherwise acquire ("utilty-build options"). The
Companies believe that a wind-based SAR is more appropriate at this time for
developing PURPA rates given that the Companies are currently acquiring or are
planning on acquiring, and could avoid or defer, non-PURPA wind generation.
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 3
Using the present gas-fired SAR, the published levelized avoided cost rate is
$90.64 per MWh, or more than 9 cents per kWh.1 The Companies include the addition
of non-PURPA wind resources in their respective IRP's preferred resource portolios.
Northwest Power and Conservation Council ("NPCC") wind resource cost and
generation assumptions result in a "busbat' price below 8 cents per kWh.2 Avista's
2009 IRP estimates wind generation costs at approximately 9.5 cents per kWh and
Idaho Power's 20091RP forecasts wind generation cost at 8.65 cents per kWh.
But simply comparing the cost of PURPA resources against utilty-build
resources does not tell the whole story. When a Utility builds a resource, it obtains all
capabilties of that resource, including any capacity, energy, and environmental
attributes, including green tags or Renewable Energy Credits ("RECs").
Assuming that utilties wil not get the environmental attributes when purchasing a
OF's output at the published avoided cost rates, utilty-build resource cost estimates
used in an SAR should be reduced by the value of the environmental attributes in order
to properly compare the costs of a utilty-built resource with the costs of a similar
PURPA resource. Utilties, and thus the utilities' customers, simply should not be
required to pay substantially more for the capabilty from a PURPA resource than they
would for the same capabilty from similar utilty-build projects.
b. In broad and general terms, how should the methodology be
modified or augmented?
The SAR methodology should be modified to use a wind farm as a surrogate
avoidable resource instead of the current SAR, which is based on a gas-fired combined
cycle combustion turbine. The current SAR cost-estimation model could be used to
1 for a 20-year project beginning in 2010.
2 NPC cost assumptions input into the present SAR modeL.
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 4
calculate rates, or a new similar but simpler model might be developed. If the current
model is used, input variables that would change from the existing gas-fired SAR
include: installed capacity cost, transmission interconnection costs, fixed and variable
operations and maintenance costs, capacity factor, project life, and escalation rates for
SAR capitaL. The cost of gas and the cost of integrating wind would be zeroed out. In
addition, and similar to the benefits the utilty customers would obtain from a utility-build
project, any environmental attributes associated with PURPA resources would be part
of the output transferred to the utilty purchasing the power.
To ensure that OFs continue to perform under their contracts, the existing
Mechanical Availability Guarantee ("MAG") should be retained for wind and other
intermittent OF resources. The 90/110 performance band should be retained for non-
variable OFs. Retention of such provisions wil provide some protection to help ensure
that customers are not overpaying for the resource.
Wind and other intermittent generation resources cannot be relied upon to
provide a significant contribution at the time of system peak. Other system resources
must step in during times of system peak when the intermittent resource is not
generating at or near its peak capabilty.
If the Commission adopts a wind-based SAR methodology to calculate PURPA
rates, the Companies propose that a reasonable capacity adder to the PURPA rates be
paid to non-intermittent (e.g., non-wind) OFs. Among other alternatives, a straight-
forward option for calculating this adder would be to evaluate the all-in Iifecycle costs of
a simple-cycle gas turbine and subtract from those costs wholesale electricity revenues
expected over the plant's life.
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 5
Wind and other renewable resources benefit from large federal tax subsidies that
have been in existence since 1992. The present subsidy- 30% of installed cost-
expires in 2012. These subsidies have been extended in nearly all years since 1992,
and it is likely they wil continue in some fashion after 2012. Subsidies have a very
large impact on wind and other renewable resource costs. If a utilty builds a renewable
resource, its customers have the opportunity to benefit from the subsidy. To protect
customers from paying too much for PURPA generation, tax subsidies must be
accounted for in the PURPA rates. Accordingly, the Commission should reflect the
benefits of these subsidies in the PURPA rate.
II. QF Contracts During Transition Period
In Order No. 30873 on page 3, the Commission noted: liAs always the published
rates remain presumptively reasonable and available to eligible OFs until changed."
While Order No. 30873 does not ask the parties to address how OF contracts executed
during the period of time when the Commission is considering changes to SAR
methodology are handled, prior history teaches that such a discussion is needed at an
early stage of this proceeding.
As the Commission is well aware, it is unlawful for the Commission to order the
Companies to pay avoided cost rates to OFs that are in excess of the utilties' avoided
costs. The Federal Energy Regulatory Commission ("FERC") has unequivocally ruled
that if utilties are required by state law or policy to sign contracts that include rates for
OF sales that are in excess of avoided costs, those contracts wil be considered to be
void ab initio. Connecticut Light and Power, 70 FERC 11 61, 012, 61, 030 (1995);
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 6
Southern California Edison Company, San Diego Gas & Electric Company, 70 FERC 11
61,215 (1995).
The Companies do not know exactly how this proceeding wil impact Idaho's
avoided cost rates. However, in the past when avoided cost rate changes were being
considered, it has been common practice for OF developers to greatly accelerate their
efforts to require utilties to enter into long-term (20-year) contracts at then-current
PURPA .rates, thereby preserving their right to be paid higher prices if the..Commission
ultimately adopts a new SAR methodology that results in lower avoided cost rates. This
"race for the doot' creates a "heads the OF developer wins, tails the utilty loses"
situation. That is, the OF developer can sign a contract and lock in current PURPA
rates and, if it eventually turns out. those rates are higher than the rates ultimately
determined by the Commission, the OF developer has locked in a higher price for up to
20 years; If, on the other hand, the Commission determines that the new rates should
be higher than the ones in effect at the time the OF developer enters the contract, the
OF developer may simply default on the contract, restructure its project with a new LLC,
and then seek a new contract at the new higher PURPA rates. .
For these reasons, the Companies believe that at the outset of this proceeding
the Commission should establish criteria that OF developers must s~tisfy to enter into,
or maintain, PURPA contracts at the existing PURPA rates. Those criteria should be
simple and should require OF developers to have some "skin in the game" to prevent
the developers from entering into PURPA contracts as a free "option," which they wil
allow to expire if new avoided cost rates turn out to be higher than the current PURPA
rates. The Companies request that the Commission consider requiring OF developers
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 7
to, at a minimum, meet a two-pronged standard for entitlement to a contract at the
existing PURPA rates.
Two-Pronged Standard
1. At the time the contract is signed, the OF developer would be
required to post cash or an acceptable letter of credit in an amount equal to the greater
of $45 per kW multiplied by the nameplate capacity of the project or an amount equal to
three months revenue under the contract. This amount would be a liquidated damages
amount that would be retained by the utilty if the OF failed to dilgently pursue the
interconnection application process, defaulted on the PPA or if the OF failed to achieve
commercial operation on its scheduled operation date.
2. At the time the PPA is signed, the OF must have obtained, at a
minimum, a feasibilty study report from the interconnection provider. In addition, at all
times, the OF developer must continue to dilgently pursue the interconnection process
and must maintain steady progress in the interconnection queue until it executes a
generation interconnection agreement. If the developer fails to maintain steady
progress, including a failure to enter into a generation interconnection agreement, the
PPA would be terminated and the utilty would retain the liquidated damages amount
previously described.
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 8
Compliance with the standards proposed by the Companies wil not prevent
viable OF projects from executing PPAs containing the current published avoided cost
rates. Rather, adoption of standards, including the two standards proposed by the
Companies, wil merely discourage speculation by developers whose proposed projects
are highly speculative.
The Companies recognize there may be other issues that need to be addressed
with respect to OF contracts while the Commission considers the desirabilty of
modifying the SAR methodology. For example, the Companies suggest that the
Commission consider authorizing utilties to include in OF contracts signed during the
pendency of this case a provision reserving to the Commission the right to prospectively
reduce avoided cost rates paid under the contract to account for the value of the REC's
associated with the power generated by such OF's if the Commission ultimately
determines in this case that REC's should be retained by the OF.
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 9
II. Conclusion
The Companies urge the Commission to conclude that the current SAR, a gas-
fired CCCT, no longer represents the tye of generation resource that the Companies
wil defer or avoid by acquiring power from OFs. Accordingly, the Companies
respectfully request that the Commission adopt a wind-based SAR methodology. The
Companies further request that the Commission establish criteria, including at a
minimum the standards discussed herein, that OF developers must satisfy in order to
enter OF contracts during the pendency of this proceeding.
L~
DATED this i ~ day of September 2009.
~itià- '
BAR ONL. KLINE
Attorney for Idaho Power Company
fi.12J; ¥-
MICHAEL G. ANDREA
Attorney for Avista Corporation
IDAHO. POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 10
CERTIFICATE OF SERVICE
L'"I HEREBY CERTIFY that on the /r day of September 2009 I served a
true and correct copy of IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS
upon the following named parties by the method indicated below, and addressed to the
following:
Commission Staff
Kristine A. Sasser
Deputy Attorney General
Idaho Public Utilties Commission
472 West Washington
P.O. Box 83720
Boise, Idaho 83720-0074
-LHand Delivered
U.S. Mail
_ Overnight Mail
FAX
-l Email kris.sasser(§puc.idaho.gov
Avista Corporation
Michael G. Andrea
Avista Corporation - MSC-23
1411 East Mission Avenue
P.O. Box 3727
Spokane, Washington 99220
Hand Delivered
-- U.S. Mail
_ Overnight Mail
FAX
-- Email michael.andrea(§avistacorp.com
Rocky Mountain Power
J. Ted Weston
Rocky Mountain Power
201 South Main Street, Suite 2300
Salt Lake City, Utah 84111
Hand Delivered
-- U.S. Mail
_ Overnight Mail
FAX
-- Email ted.weston(§pacificorp.com
-(l~Barton L. Kline
IDAHO POWER'S AND AVISTA'S INITIAL JOINT COMMENTS - 11